Lawmakers Weigh a Wall Street Tax

By

John D. McKinnon

Updated Dec. 19, 2009 12:01 a.m. ET

WASHINGTON—Lawmakers are considering a financial-transactions tax that takes aim at Wall Street to help Main Street. But the tax could wind up striking others, too, including pension funds, commodity-dependent businesses, and even ordinary investors.

Congressional advocates describe the new tax as a matter of fairness: Taxpayers bailed out Wall Street, so Wall Street must help rebuild the economy and shore up the government's shaky finances. Some experts say the tax also might reduce market volatility.

Supporters say the hit for typical individuals and even most institutional investors is likely to be light, thanks to the tax's relatively low rates and generous exemptions. The plan would assess a tax on trades in many kinds of financial assets. The rate for stock trades would be 0.25%, or $250 on a $100,000 transaction. The rate would be less—0.02%—for trades of options, futures and other derivatives.

The law would provide a $250 tax credit, effectively exempting everyone from the first $100,000 of all stock trades. And purchase and sale of mutual-fund shares would be exempt no matter how large, as would trading of assets held within personal savings accounts such as a 401(k).

The trading tax isn't likely to become law in the immediate future. But "there is considerable support for it" among Democrats, says Rep. George Miller (D., Calif.), who adds that the tax also is "very much" on the table for deficit reduction next year. The tax would raise an estimated $150 billion a year.

In recent weeks, the financial industry has begun a campaign to reframe the debate, contending the tax would hurt, not help, average Americans. "As we read it, it's clear it's going to be a tax on Main Street," said Paul Stevens, president of the Investment Company Institute, a trade group for mutual funds.

Despite the exemption for sales of mutual-fund shares, mutual-fund investors would be hit with tax for their pro-rata portions of trading, at least when the mutual fund is held outside a tax-advantaged account such as a 401(k).

The mutual-fund industry also gripes that the tax would introduce new complexity into their record-keeping.

At least some ordinary investors and nonprofit groups likely would be socked, along with high-volume traders.

The tax could even hit businesses such as airlines that engage in futures and derivatives trading to hedge against commodity-price spikes. Already, there is talk of carving out exemptions for them.

Pension plans and other nonprofits also wouldn't be protected from the tax, at least in the House version sponsored by Rep. Peter DeFazio (D., Ore.) and about two dozen other members. Aides said their trading turnover usually isn't high enough to create a big tax impact. But sponsors say they are willing to change their plan, and sponsors of a similar Senate bill do plan to exempt pension plans, aides said.

More broadly, critics charge, the tax would tamp down asset prices and limit gains for everyone. About 30 investment firms and industry associations have formed a loose coalition to fight the tax. The group also includes major exchanges that would have to collect the tax in most cases.

"Clearly [the tax proposal] is gaining support, but there's tremendous push-back from Wall Street," says Mr. DeFazio, the chief sponsor of the House version of the tax.

Mr. DeFazio says industry concerns about potential harm to the economy and markets echo similar groundless charges against a 1930s version of the tax. Back then, in the midst of the Great Depression, the U.S. enacted a transactions tax that was larger than the one being proposed now. It lasted until the mid-1960s and produced no significant ill effects, he says.

Supporters say concerns about complexity also are exaggerated, noting that the mutual-fund industry already has to deal with complex tax issues such as distribution of capital gains to fund shareholders.

There also are potential wrinkles in the plan that could allow sophisticated traders to escape the tax. Many in the industry worry, for example, that the tax could drive high-volume trading—if not the traders themselves—offshore, noting that high-tech advances have made it easier than ever to conduct large-scale financial trades from distant locations.

But Mr. DeFazio's bill would tax transactions by U.S. citizens no matter where they occur. To escape the tax, he says, people would have to move their citizenship, not just their money.

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